Their Causes and How to Prepare

Inflation (the increase in prices of goods and services) is big news lately and a worry for many. However, if it remains in check and not severe, inflation is something that proper financial planning can prepare you for and should not be disruptive to your financial security. In fact, as a Certified Financial Planner, I can suggest many ways to not only plan for inflation but to profit handsomely from it.

So what is going on?

The cause of inflation is something that economists are not always in agreement on. We’ll discuss the main economic theories behind it.

Inflation can be caused due to an increased money supply. For example, a fiscal policy increase in the money supply is accomplished by the government asking monetary authorities to create more of it, diluting its value through increased supply, then giving this new money as a stimulus or bailout. The government borrows more money and injects it into the economy, and they owe it back with interest. If the loan is not paid back, the government must ask to increase the supply (by the amount of interest), thus always borrowing even more with interest and repeating the cycle. This creates ballooning government deficits.

Or, money is created by monetary means, more commonly, by loaning it into existence via the banking system. Through reserve account credits at the fed level, which allows commercial banks to borrow and add to their reserves, which they, in turn, can further loan on secondary markets to increase the total monetary supply.